Saturday, May 11, 2013

How FHA 203(K) Loans Are Used

What's unusual about FHA 203(k) loans is, the amount covers the costs of purchasing and making repairs. The program is an option for both first-time and previous homebuyers and offers a 30-year mortgage and an amount for fixing up the purchased property.

Yet, these home improvement loans come with guidelines beyond an ideal credit score and employment history. For borrowers considering purchasing and fixing up a home, keep the following points in mind:

Purchasing

Any FHA 203(k) loan must go toward a principal residence that must be lived in no later than one year from closing. The property cannot be for recreation, vacation, investment, commercial, or renting, unless the borrower is an owner-occupant of a multi-family home.

The loan, however, can cover the cost of transforming a commercial building into residential property or a multi-unit dwelling into a two- or four-family home. The loan can be applied to existing single-family properties and FHA-approved condominiums but not mobile homes.

Sales Price

Unlike other mortgages, the sales price for FHA 203(k) loans includes both the total purchasing price and any rehabilitation. The price cannot go above FHA Maximum Loan Limits.

Improvements

No matter if an FHA 203(k) loan or 203(k) Streamline loan is used, any improvements must total at least $35,000. 203(k) Streamline loans, however, have a limit, specifying repairs and rehabilitation cannot exceed $35,000. All cannot exceed the loan-to-value ratio and the FHA Maximum Mortgage Limit.

Repairs for both types vary with each home improvement loan. FHA 203(k) loans can be applied to any structural alterations and damage repair; termite or water damage; converting a single-family home into a duplex or a three-family home into a six-family home; adding energy-efficient features; replacing any wells, septic tanks, windows, and water systems; repairing flooring, roofing, hand rails, down spouts, and exterior siding to improve living conditions; and adding handicap accessibility.

For 203(k) Streamline loans, however, all repairs must be made before the borrower moves into the property. Acceptable repairs include improvements to the basement, deck or patio, electrical system, floors, and HVAC system; minor remodeling; new modeling, and any new windows, painting, plumbing, roofs, septic or well system, sewer hookup, or weatherization.

Both loans, as well, require the repairs be carried out in a specific fashion. Once the loan is closed, all repair funds are placed in a separate escrow account, and the lender manages the payments made to a state-licensed contractor. A contract for all repairs must be put in writing, including a description of the work being done, a schedule, items and materials, and terms.


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